Coronavirus Pandemic Impact on Indian Economy: A Contrarian View

There is a lot of commentary around about how this pandemic is going to hit India’s economic prospects hard. There is a near unanimity that we are going to see the first economic contraction since 1980. But, I would like to take a different stand. I have a multiple reasons to believe that we might escape any contraction at all, at least in terms of nominal economic growth. If things turn out to be good, we might even see a modest expansion in real terms. The reasons are as follows:  

• The lockdown precipitated by pandemic hit India, and others, during the Mar-June period. For India, this period was specifically between Apr-June. Historically, this quarter is the smallest GDP output quarter for India. Looking at quarterly GDP statistics for last decade, this quarter contributesabout 22-23% of the annual output. Comparatively, for developed economies, it contributes around 26-28%. India was hit by contraction in the smallest output time-period for its economy, whereas others were hit during a relatively higher output time. For economies where tourism contributes a big chunk of output (Greece, Italy, Spain etc), during the summer months of Mar-June, this hit would be especially hard.  

• A key component of national income statistics is Net Exports (Exports minus Imports). India runs the 3^rd largest merchandise trade deficit in the world. For the longest time, this component has contributed negatively to the  national income calculations in India. Falling energy and commodity prices will reduce India’s merchandise deficit and the negative contribution of this line item in the national income statistics will reduce.  

• Reduction of spends on foreign goods & services. Indians are large spenders on foreign tourism and education. Just for tourism alone, it was estimated that Indians spend 45 billion US$ abroad in 2019. Both of these categories will be hit severely due to pandemic. But what isn’t spent abroad, will mostly be spend within country or might be saved and invested (like  equities). It can be argued that Indian tourism might be hit similarly. But our peak tourism season had already been over by March.  

• Resurgent Farm sector. Farm sector escaped the early stages of lockdown, as it was exempted after Lockdown 1. Good rainfall has led to record harvesting in Rabi season and record sowing for Khariff. Rains have replenished the water reservoirs to higher than multi-year average levels, ensuring that the water stress will be reduced in this year. Tractor sales, a long-term proxy of farm-sector health, have been booming since June. Higher food inflation, although bad for urban customers, boosts rural incomes. This has picked up since July. It will make things difficult for the monetary policy, but for the time being, farmers will get a good price for their record produce. FMCG companies have reported higher sales recovery in rural areas compared to urban in their June results. They also expect rural demand to grow at a higher rate than urban, reversing a two-year trend (that set in mostly after demon/GST period).  

• There are other minor factors for which trends are visible. These are:  
• Rising global demand for key Indian exports, IT and Pharma: Whether it is WFH solutions, increased data processing requirements or vaccine manufacturing capability, India will benefit from increased global spending in these sectors.  
• Restructuring in housing demand from large Urban agglomerations to Tier 2 cities: The centre of gravity for real estate will shift from Mumbai/NCR to cities like Jaipur/Indore/Lucknow/Chandigarh and current smaller agglomerations of Bangalore/Hyderabad/Pune. Jaipur and Indore are both emerging as next big booming start-up hubs. Real estate recovery will be lead by firms in these markets.  
• Cheap capital: Indian companies are on an overdrive to raise capital through bonds and IPOs. Bond yields are significantly lower than commercial banking capital and Indian companies will use this to retire some old debt with high-interest burden. This will free up their resources for reinvestment or boost profits. Patanjali has recently completed a fund-raise through bond issuance.  
• Pent-Up demand of Q1:  The pent-up demand from Q1, for everything from Cars/bikes/laptops to cement/iron/aluminium will be visible Q2 onwards. Rural demand along with festive season is already driving two-wheeler market.  
• Higher Gold Wealth: Gold prices have increased by 40% this year. This has increased the real wealth of Indian families. Indians hold more than 25000 tonnes of gold in their homes. Some of this is already being deployed to tide over hard times using Gold Loans. The demand for Gold Loans has increased. Some of this higher wealth may be used for consumption.  

The Q1 GDP number, to be released on 31st Aug, will show a contraction lower than estimated by everyone. This was first estimated to be around 40% in May. By last week, this figure had come down to 15%-25% range. The final number might be towards the lower-end of this spectrum. It will be, very predictably, followed by commentary about GDP measurement techniques and their faults and frauds. This will be even louder, if the final figure for FY21 doesn’t show any contraction.  

It is easy to flow along with the negative economic commentary. But things on the ground might not be as bad as they seem in some of the high-frequency indicators used in economic reporting. For large number of people, 800 million+ odd in villages and tier-3 cities, economic conditions or economic suffering is definitely not worse or different from their long-term average. They are actually getting some of benefits from a multitude of social sector scheme such as Ujjwala, PM Kisan and Jan Dhan Yojana, which they didn’t a decade back. They are aware of the economic suffering in the cities and not really feeling as acutely left behind. A decade back, there was a feeling of being left behind, as cities seemed to be booming and urban India getting rich by each passing day.  

Markets and Modi are probably aware of this fact that economy is not doing as bad as it is being reported and recorded. Those who are not, are wondering about only two questions:  

• Why is Namo so popular despite economic slowdown? 
• Why are share markets booming despite economic slowdown?